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At a time when South Africa’s economic growth is slowing and inflation is rising, the chief economist of Old Mutual Investment Group South Africa (Omigsa), Rian le Roux, is providing a relatively upbeat assessment of the outlook for both.

SA ahead of curve in responding to rising prices, says Omigsa’s Le Roux
July 23, 2008

By Ethel Hazelhurst

Johannesburg – At a time when South Africa’s economic growth is slowing and inflation is rising, the chief economist of Old Mutual Investment Group South Africa (Omigsa), Rian le Roux, is providing a relatively upbeat assessment of the outlook for both.

At a presentation yesterday, Le Roux said the interest rate cycle might have peaked.

“August will be a close call,” he said, referring to the meeting of the Reserve Bank’s monetary policy committee (MPC) next month. “But I will be surprised if there are further rate increases.”

The MPC will decide whether the total 5 percentage point increase in rates since June 2006 has been effective or whether more monetary policy tightening is needed to bring inflation within the target range.

The CPIX (consumer price index minus mortgage rates) has been above the 3 percent to 6 percent target band since April last year. In May this year it stood at 10.9 percent.

“The peak in inflation and interest rates is suddenly much clearer, though external shocks still pose a risk,” said Le Roux.

Though there are short-term upward pressures on inflation – from higher electricity tariffs and double-digit wage demands – Le Roux predicted CPIX would peak at 13.5 percent over the next few months.

“Inflation will decline gradually at first, but faster next year,” he added.

He listed factors likely to keep inflation in check.

These include a slowing economy, which blunts pricing power; signs that food inflation may be easing; a lower oil price; a relatively strong rand; and technical factors arising from the introduction of a new consumer basket.

Le Roux said rates would not start to fall until the “inflation downtrend is established and [inflation] expectations are adjusting down again”. He put this point in the second half of next year, though “it could be sooner”. However, “sticky inflation” was likely to limit the speed of the rate cutting cycle.

Compared with many other countries, South Africa is “ahead of the curve” when it comes to responding to rising inflation by putting up interest rates, according to Le Roux.

His comments on interest rates support the views of other economists who are revising their earlier expectations that the rate rising cycle has some way to run.

Le Roux entered the debate about the validity of official inflation figures on the side of Investec Asset Management, which said last week that inflation was more than 2 percentage points lower than the official figure when calculated on the new basket, which would be used from the beginning of next year.

The reweighting of the basket has downgraded the importance of food in the total basket.

Food has been a major driver of high inflation in the past year.

The weights used in the current consumer basket were introduced in 2002.

Le Roux said Statistics SA had waited too long to update the basket.

Addressing fears that the economy could move into recession, he said: “Economy-wide recessions are relatively rare events.”

He forecast that growth would slow to 3 percent from more than 5 percent in recent years. “Growth of 4 percent is possible,” he added, referring to finance minister Trevor Manuel’s recent confirmation of his budget forecast that gross domestic product (GDP) would grow 4 percent this year.

Le Roux said growth was being supported by infrastructure projects. “The public sector is to spend R520 billion, or 25 percent of GDP, over the next three years.”

Another supportive factor identified was growth in “industries feeding off accelerating government programmes”.

Le Roux said a crash in consumption was unlikely, given wage settlements of more than 10 percent and rising government transfer payments.